Don’t Trust the low Unemployment Rate for the Answer!
By Doug Short, Advisor Perspectives:
The unemployment rate beat expectations by dropping from 4.9% to 4.6%, and the number of new nonfarm jobs (a relatively volatile number subject to extensive revisions) was above forecast at 178,000. A decline in the unemployment rate is a good thing, right? Not in the November employment report.
The Shrinking Unemployment Rate
The closely watched headline unemployment rate is a calculation of the percentage of the Civilian Labor Force, age 16 and older, that is currently unemployed. Let’s put this metric into its historical context. The first chart below illustrates this monthly data point since 1990.
In the latest data this indicator dropped to 4.6%. The age 16+ population grew by 219,000, but the labor force (the employed and unemployed actively seeking employment) more than offset that growth with a shrinkage of 226,000. The the number of employed grew by 160,000 while 387,000 unemployed vanished. How can that be? Obviously, the lion’s share of the unemployed didn’t join the ranks of the employed. They simply disappeared from the labor force.
Unemployment in the Prime Age Group
Let’s look at the same statistic for the core workforce, ages 25-54. This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two income households that downsize into one-income households.
In the latest data this indicator has dropped to 4.0% from 4.2% the previous month. The cohort population grew by 37,000, but the labor force shrank by a whopping 231,000! The breakdown of the shrinkage is 9,000 employed, and 222,000 unemployed. Here we can clearly surmise that the 0.2% drop in the employment rate was the result of the unemployed leaving the labor force.
A More Sobering Measure
A wildcard in the two snapshots above is the volatility of the Civilian Labor Force — most notably the subset of people who move in and out of the workforce for various reasons, not least of which is discouragement during business cycle downturns. The chart below continues to focus on our 25-54 core cohort with a broader measure: The Labor Force Participation Rate (LFPR). The LFPR is calculated as the Civilian Labor Force divided by the Civilian Noninstitutional Population (i.e., not in the military or institutionalized). Because of the extreme volatility of the metric, our focus is the 12-month moving average.
Based on the moving average, today’s age 25-54 cohort would require 2.4 million additional people in the labor force to match its interim peak participation rate in 2008 and 3.7 million to match the peak rate around the turn of the century.
Why are so many more labor force participants needed for a complete LFPR recovery? When the economy is moving at full speed, as in the late 1990s, jobs are abundant, which encourages the population on the workforce sidelines to join the ranks of the employed. Today’s economy doesn’t offer that sort of encouragement.
The next chart below is calculated as the Civilian Employed divided by the Civilian Noninstitutional Population. Again our focus is the 12-month moving average. A significant feature of the Employment-to-Population Ratio is that it isn’t affected by the volatility of labor force participants who, for various reasons, are unemployed.
First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 2.7 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 4.7 million participant increase.
A Structural Change in the Economy
The charts above offer strong evidence that our economy is in the midst of a massive structural change. The three mainstream employment statistics — unemployment, labor force participation, and employment-to-population — all document an ongoing economic weakness far deeper than the result of a business cycle downturn.
In order to discount the general belief that the aging of the baby boom generation is a major factor in weak employment, we’ve focused on the 25-54 age group. Also, by excluding the age 55-64 decade associated with early or pre-retirement, we’ve eliminated a cohort that might include a major source of discouraged or less-determined workers.
The Growth of the Elderly Workforce
Let’s close this analysis with a chart that essentially demolishes the prevailing view of our aging population as a demographic drag on labor supply. Here is the ratio of the 65-and-over cohort as a percent of the employed civilian population all the way back to 1948, the earliest year of government employment data. Mind you … these people are not only in the workforce, but also actually employed.
The 12-month moving average of elderly employment is at its historic high of 5.9% — now over double its low in the mid-1980s. This is a trend with multiple root causes, most notably longer lifespans, the decline in private sector pensions and frequent cases of insufficient financial planning. Another major factor is the often surprising discovery by many of the elderly that, financial consideration aside, the “golden years of retirement” are less personally satisfying than productive employment. Note that the growth acceleration began in the late 1990s, prior to the last two business cycle downturns (aka “recessions”).
We are clearly experiencing a structural change in employment, one that continues to have a major impact on the overall economy. The fact this change was exacerbated by a business cycle downturn in late 2007 should not blind us to its structural nature. By Doug Short, Advisor Perspectives.
But households get a feel-good illusion. Read… OK, I get it: Companies Clamor for Cheap Labor, Fed Delivers